Car Loans in Malaysia – Conventional vs Variable Rate

If you drive a car, a car loan is something that you’ll almost certainly have to undertake a couple of times in your life. In this article, we explain the difference between a Conventional Car Loan and a Variable Rate Car Loan, and how they’ll affect your wallet in the long run.

Conventional Car Loan

A conventional car loan is a rigid form of car loan where your interest is calculated based on the principal amount you borrowed and the length of your loan period. With conventional car loan, your monthly instalment is “fixed”. So even if you decide to pay more for one month, the excess monthly payment you make is treated as advance payment for the future, and does not reduce the interest on your car loan.

Example of How Conventional Car Loan Works

Your Principal Loan Amount: RM100,000
Loan Interest Rate: 2.5% 
Loan Period: 5 years

Interest Amount: 2.5% x RM100,000 x 5 Years = RM12,500
Your Monthly Instalment: (Principal Loan Amount + Interest) / 60 Months = RM1,875

If you decide to pay RM2,000 in one particular month instead of RM1,875, the extra money you pay does NOT reduce the total interest you incur.

Variable Rate Car Loan

A variable rate car loan is a type of car loan with interest that fluctuates along with the prevailing Base Lending Rate.  The interest rate of a variable rate car loan is commonly higher than that of a conventional loan. However, because variable loan accounts calculate your interest based on the Reducing Balance Method (where interest is calculated over time based on the loan amount AFTER deduction of what you’ve paid), the interests for both fixed rate and variable rate car loans could work out to be roughly the same.

In Malaysia, there is also a flexible type of variable rate car loan that offers you the freedom to reduce your interest by making extra payments toward your car loan. This type of car loan comes with a linked current account, and works exactly like a flexi-home loan (except for cars). An example of one such car loan in Malaysia is offered by Mach by Hong Leong.

Example of How An Account-Linked Car Loan Works

Assuming the same interest rate and loan period as above, this is what happens when you decide to deposit RM10,000 into a linked account:

Your Principal Loan Amount: RM100,000
Amount in your Linked Account: RM10,000
Amount that incurs Interest: RM100,000 – RM10,000 = RM90,000

Interest Amount: 2.5% x RM90,000 x 5 Years = RM11,250
Your Monthly Instalment: (Principal Loan Amount + Interest) / 60 Months = RM1,687.50

Which Car Loan Should I Choose?

There are no fixed rules when it comes to choosing the kind of car loan you want. Generally, people who like flexibility and have disposable income would find an account-linked car loan beneficial as it gives you the freedom to pay off your car loan faster as well as the option to reduce the amount of interest on your loan. However, people who prefer consistency might favor conventional car loan due to its predictable nature. Whatever it is, when it comes to car loan, the important thing is to do your research and have a clear repayment strategy.

Posted in: car loan